You probably have heard of blockchain as the underlying technology for Bitcoin, the largest cryptocurrency in the world. However, blockchain technology goes well beyond the financial market and its unique features could be used in many different industries such as healthcare, logistics and transportation, and marketing, to just name but a few.
In fact, it has already started revolutionizing the world as many industries are leveraging blockchain to streamline their business routines and daily work.
In this article, we’re going to talk about the basics of a blockchain system, how it works, its unique features, and how different industries are benefiting from it.
A blockchain, in very simple terms, is a shared book between the members of an open (or sometimes private) network that records every transaction between the members. Each member of the network (blockchain) keeps their own copy of the book and can review it to see the transactions between the members and verify them, if necessary.
In a blockchain network, members are responsible for maintaining the book and keeping it up-to-date. They do this by updating their own copy of the book to be in sync with other members of the system. In this way, there’s no need for a centralized entity to run the network and keep everything in check.
The shared book we talked about has a technical name: The Ledger. A blockchain ledger is where all the transactions are recorded. As a member of the blockchain system, you can participate in the maintenance of the network.
For that, you would need to keep your own copy of the ledger and stay in connection with other members of the network to keep it up-to-date by adding new transaction data to it. It’s quite important as the ledger is the proof you use to confirm the validity of each transaction before adding it to the ledger.
You have to do it with the other network members as there’s no single entity like a bank to verify the information and a consensus mechanism is how you would reach an agreement with them.
As we mentioned before, the blockchain nodes are responsible for verifying transactions, as there’s no single entity in control of the system (Decentralized). The consensus algorithm helps the members of the blockchain (nodes) to reach an agreement on which transactions to add to the network. In other words, they verify each transaction based on their own copy of the ledger (Transparent), adding them to the blockchain in batches, called blocks.
Blocks in a blockchain network are linked to each other in a way that makes them really hard to change (Immutable). The system uses mathematical calculations (cryptography techniques) to link each newly created block to the previous one.
Now, let’s say a party wants to change the information in one of the blocks. They have to create a new block with the new information, deleting all the blocks after that block and creating them from scratch. Creating a new block may differ based on the consensus mechanism but it always requires extensive investment or stake from the members, usually in monetary form (Secure).
The blockchain members have to keep the network running by verifying and adding new transactions to the network, the same way a bank would do with your regular transfers.
A consensus mechanism is how you and the other blockchain members verify a transaction together based on the information you have saved on your copy of the ledger. If more than 50% of the network believes that the transaction is valid, the transaction will be added to the network, otherwise, it would get rejected. The way blockchain members reach an agreement defines a consensus algorithm.
As we mentioned above, verifying new transactions in the form of new blocks is not an easy task and requires some skin in the game. So you may ask what’s there in it for users that they’d be willing to invest all this effort into a system.
Well, the blockchain network will reward the participants for their work in keeping the system up and running. The reward is mostly paid in the native currency of the blockchain which will be created after the new block is made. In the Bitcoin blockchain, for instance, the rewards are paid in bitcoins (BTC).
Proof of Work (PoW) is the first and most well-known consensus algorithm for blockchain systems. Even though the idea dates back to 1993, Satoshi Nakamoto, the inventor of Bitcoin, was the one who publicized the concept in Bitcoin’s whitepaper which was published on October 2008.
The process of creating new blocks of transactions in a PoW system is called “Mining”, which needs special, power-intensive, and quite expensive hardware. Through mining, you have to solve complicated mathematical problems and broadcast the answer to the network.
After that, other members can simply verify the answer which allows you to mine the new block and earn rewards. Of course, when we say “You”, we don’t mean you personally! All you have to do is buy the hardware, install the required software, and pay your electricity bills on time so that you’re device can keep on mining.
We can categorize blockchain systems into 3 main groups based on their level of decentralization:
Public Blockchain: As the name suggests, a public blockchain is open to everyone and offers the highest level of decentralization. You can simply participate in a public blockchain by having a computer and internet connection.
You can also check the records of transactions on the blockchain through a Blockchain Explorer. Bitcoin and Ethereum are the top two public blockchains in the world.
Private Blockchain: The opposite of a public blockchain. A private blockchain is designed for a specific group of users, probably within an organization or company, and only authorized people can access and use it.
Consortium Blockchain: It’s the more private and centralized version of a public blockchain. This type allows different organizations or companies to share their work and collaborate using a distributed ledger. Consortium Blockchain is the go-to option for many organizations to manage their work and partnerships by leveraging the security, transparency, and safety of a blockchain system.
Even though Blockchain is mostly associated with Bitcoin, the technology goes beyond financial services and can streamline many other market sectors and industries. Let’s see some examples together:
Hospitals can use blockchain technology as a shared database among themselves to save patient and disease information in a secure and shared manner. This method can cut costs and time required to transfer patients’ information from one place to another. It can also prevent the leak of sensitive information which is quite often for medical information.
Supply chain management is one of the best applications of blockchain. The transparency and immutability of blockchain technology ensure the validity of supply chain data among various partners. It can lead to a more cost-efficient and smoother delivery, providing customers with a secure and reliable system to trace their items step-by-step from the factory to their homes.
Blockchain technology offers smart contract functionality which can be used to automate payments based on predefined criteria. Marketers can benefit from this in their advertisement or other marketing efforts to make payments only if certain metrics are reached. The immutability of blockchain can also be used for verifying the authenticity of the results.
IT operations (ITOps) and tasks can benefit from the decentralized nature of blockchain technology in securing their data. One of the main benefits of a decentralized network is that there’s no single point of failure anymore. This would make things easier for IT departments as edge computing continues moving data and resources away from the center of the organization, making them even harder to protect.
Aside from tokenization or using crypto assets for value transfer, blockchain can be used as a shared database between different financial institutions which allows for trustless collaborations. This simply means that different parties involved in a transaction don’t have to know or trust each other and can rely on the transparency of a blockchain system to manage their financial work in a very secure and reliable manner.